Pondering worker-funded health plans

Employers consider a shift to beat rising costs

SAN FRANCISCO (CBS.MW) -- Employees soon may select and finance their health-care choices as they do retirement plans.

"It's a way to give consumers more control over how their health-care dollars are spent."
Paul Fronstin,Employee Benefits Research Institute

As the U.S. economy stumbles and health-care costs rise, more employers are considering offering "defined contribution" or DC health benefits, according to the Employee Benefit Research Institute in Washington.

The new style would shift varying degrees of coverage responsibility to workers through cafeteria-style benefits, and voluntary programs would jeopardize the overall health-insurance rate and solvency of public systems, experts say.

"It's a way to give consumers more control over how their health-care dollars are spent," EBRI senior research associate Paul Fronstin said. "There's a lot of interest in it, but there's a lot of hesitation because of the uncertainties."

Under the new regime, firms either would choose the insurance company and the options they'll allow to keep the expanded choices limited, send employees into the independent market with vouchers to buy their own insurance, or pass on the cash value of medical benefits through increased salaries.

With a low unemployment rate of 4.2 percent, many employers don't want to risk making changes any more radical than the first option, where companies continue to provide a payment but no longer have an active role in choosing the plans, Fronstin said. Some companies already have made that transition.

More choice, more confusion

While the move to DC health care would give employees more choice, critics say the cost would be a fragmented system in which consumers lose the one-stop shopping of centralized claim management among HMO, fee-for service, and PPO plans.

"There's a lot of administration when you have a lot of choice," said Jerry Mattern, chair of compensation and benefits for the Society for Human Resource Management.

Apart from the paperwork, the biggest cost may be the time it takes to determine which plan offers the best value and highest quality, questions companies historically have researched for the benefit of groups and not individuals, Fronstin said.

"Unlike a 401(k) plan, there's no way to boil down a health plan's performance to a number," he said.

Consumers would have to do due diligence such as determining what percentage of members go for routine check-ups and how many are covered for beta-blockers after a heart attack, he said.

Employers also are weighing the costs. While recent surveys show about half are receptive to the idea of providing DC health benefits, few are willing to take the plunge. Last year, 45 percent of 276 major companies said they were interested, but only 8 percent said they were very interested and just 4 percent reported they were likely to make the switch, according to a poll by William M. Mercer.

Insuring against underinsurance

The tight labor market has led many employers to foot a larger portion of their workers' medical expenses. The cost for an employee's health plan was $2,426 last year on average, of which employees paid 14 percent, or $28 a month, Fronstin said. Five years ago, workers paid 21 percent of their costs, which came to $37 a month.

"Uninsured rolls will rise and hospitals and physicians will get stuck with enormous costs of uncompensated care."
James Bentley,American Hospital Assn.

Of the three options for defined contribution health benefits, the hands-off element of cash vouchers and salary boosts are most likely to backfire, said James Bentley, spokesman for the American Hospital Association, a trade group representing 4,200 U.S. hospitals.

Directing workers to buy their own insurance likely would overwhelm the independent insurance market and tempt workers to pocket the money in the misguided belief that they won't need service.

"Uninsured rolls will rise and hospitals and physicians will get stuck with enormous costs of uncompensated care," he said. About 42 million Americans don't have health insurance.

Potential trade-offs

It's unclear how the three levels of DC health benefits would affect workers' share of the costs, Fronstin said, but employers have to tread carefully. "They're in a position to offer more choice. I'm not sure they're in a position to not pay for it."

Still, health-care costs are projected to rise 11 percent this year, according to the Health Insurance Association of America. Overall, changes to employer-based health insurance will only become mainstream if they have the support of the rank-and-file.

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